U.S. Debt and the French Connection

To understand the domestic-policy lapse represented by President Obama’s refusal to embrace the recommendations of his own Simpson-Bowles Commission, one might look to Europe, where fiscal and economic woes are roiling politics ominously. The same will happen here, and soon, if the U.S. government doesn’t address its debt overhang with more force and effectiveness than the Europeans have managed to muster—or than Obama has managed to muster.

This warning was on display in France’s presidential elections Sunday, in which voters chose socialist François Hollande over incumbent conservative Nicolas Sarkozy and set the country upon a new course. The result can be seen as what happens when a country feels itself in a political bind emanating from an economic bind. Although Europe’s debt crisis did not emerge explicitly as the primary campaign issue, nearly all the major domestic issues that did emerge can be traced to that overarching fiscal emergency.

The French majority rejected the "austerity" policies fashioned by Sarkozy and German chancellor Angela Merkel to address the massive and rising public debt on the Continent, particularly in Europe’s southern-tier countries of Greece, Italy and Spain. The idea was that spending cuts were necessary to place these and other governments on a more solid fiscal footing in order to tame the debt monsters stalking Europe.

But this formula hasn’t been working. Austerity has constricted enterprise, thwarted economic growth and exacerbated the fiscal woes that were the policy’s targets. So now France has rejected that approach in favor of what are called "growth" policies.

And France is not alone. The weekend’s Greek elections roiled that nation’s political waters even more powerfully, slamming the ineffectual centrist parties that had dominated the country’s politics and boosting the standing of more extremist forces, including the Coalition of the Radical Left (or Syriza), which nearly tripled its share of the vote; the KKE Communist Party; and the neo-Nazi Golden Dawn Party.

Even Merkel’s own Christian Democrats suffered a serious setback in state elections in Schleswig-Holstein as increasing numbers of Germans there expressed discontent with her financial support for Greece and other financially strapped southern nations (largess that was extended in exchange for those countries adopting austerity policies).

These voters are not wrong in pummeling this austerity agenda. No debt-reduction plan can work if it is unconnected to growth measures. As economic consultant David M. Smick has noted, the European bureaucrats demanded the Greeks reduce their debt without offering reforms to encourage growth. The result is that Greece’s debt-to-GDP ratio, at 120 percent before the crisis, increased to 170 percent (in part because of a declining GDP).

So if austerity is under assault in Europe, what’s to replace it? In France, Hollande’s answer is his "growth" agenda, but this basically means more governmental spending of the kind that generated the country’s debt crisis in the first place. Debt is 90 percent of France’s GDP, and the country faces trillions of euros in unfunded pension and retiree health-care liabilities. Hollande also wants to boost the top tax rate to 75 percent to fund a government that currently accounts for 56 percent of GDP.

The political mood in Greece seems even more vehemently in favor of simply returning to the old ways, which rewarded citizens for not working and for enjoying the status of being a drag on the state. As the Wall Street Journaleditorialized on Monday, "As for the rise of the extremist fringes [in Greece], this should serve as a warning of what happens in countries where mainstream parties fail."

What is likely to emerge as austerity’s counterpoint is an "inflation fix" of the kind touted constantly by The New York Times’s Paul Krugman—more governmental spending tied to greater monetary easing by the European Central Bank. No doubt Hollande and his counterparts in the southern countries will try to move boldly in that direction.

But it won’t work. It’s frivolous to think that these nations can address their debt problems through Keynesian spending designed to spur sufficient demand—and hence growth—to diminish the debt. Besides, Germany’s Merkel, whose nation must fund such policies, isn’t likely to bend easily to these initiatives or to accept inflationary policies by the central bank. Thus do we see prospects for a major rift in the politics of the European Union accompanied by further spiraling debt, further societal frustration and further lurches toward fringe politicians. It isn’t hyperbolic to suggest the future of the euro and the European Union itself could hang in the balance as this political drama unfolds.